Morningstar DBRS Confirms BBVA's Issuer Rating at A (high)/R-1 (middle), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the Group), including the Group's Long-Term Issuer Rating at A (high) and the Short-Term Issuer Rating at R-1 (middle). In line with Morningstar DBRS's methodology and following the recent upgrade on the Kingdom of Spain's credit ratings, BBVA's Long-Term Critical Obligations Rating was upgraded to AA and its Short-Term Critical Obligations Rating was upgraded to R-1 (high). The trend on all BBVA' credit ratings is Stable. The Group's Intrinsic Assessment (IA) remains at A (high) and its Support Assessment was maintained at SA3. For the full list of credit ratings, see the table at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
BBVA's credit ratings reflect the Group's robust and resilient earnings over the recent years on the back of its diversified franchise, across Spain, Mexico, and, to a lesser extent Turkey, and its well-controlled operating cost base, which has resulted in strong efficiency levels compared with its peer group of large banks. However, Morningstar DBRS expects profitability to have peaked in 2024 as it is mindful of current geopolitical risks and heightened policy uncertainty resulting from U.S. policy changes, particularly tariffs, which could create volatility and affect the operating environment for banks, especially in Mexico and South American countries in the case of BBVA. In addition, Morningstar DBRS expects profitability in Spain, the largest contributor to the increase in BBVA's net attributable income in F2024 year over year (YOY), to slightly decrease as Net Interest Income (NII) reduces in a declining interest rate environment.

BBVA's credit ratings also consider the Group's strong funding and liquidity profile, backed by its large and stable deposit base, as well as the Group's sound capital position, with solid buffers over regulatory requirements and robust ability to generate capital. Finally, the credit ratings also take into consideration the Group's solid asset quality metrics on the back of strong coverage ratios. However, Morningstar DBRS notes BBVA's high and growing net cost of risk compared with similarly rated peers, mainly explained by its international footprint in Mexico and other South American countries, as well as the expectation that credit losses could continue to increase in coming quarters if the macroeconomic environment deteriorates because of increased geopolitical risk.

The Group's credit ratings were previously positioned above the Kingdom of Spain as a result of the Group's strong credit fundamentals combined with a good level of international diversification. However, with the recent upgrade of the Kingdom of Spain, the Group's credit ratings are now positioned in line with the sovereign rating. The Group's IA of A (high) is positioned at the lower end of the Intrinsic Assessment Range to reflect the potential challenges in the operating environment. Moreover, Morningstar DBRS notes with respect to the Group's international diversification that approximately 83% of total assets and 88% of total Income Before Taxes is contributed by three countries, Spain, Mexico and Turkey, and that the Group's geographic diversification is predominantly in countries whose sovereign credit ratings are lower than that of the Kingdom of Spain.

CREDIT RATING DRIVERS
Morningstar DBRS would upgrade the credit ratings if the Kingdom of Spain's sovereign credit rating is upgraded and BBVA is able to maintain similar credit fundamentals. Over the longer term, Morningstar DBRS would also upgrade the credit ratings if BBVA is able to significantly increase its proportion of revenues from international countries that have higher sovereign credit ratings than the Kingdom of Spain.

Morningstar DBRS would downgrade the credit ratings if BBVA's risk profile, profitability, and/or capital position materially deteriorate.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong/Good
BBVA is the second-largest banking group in Spain by domestic assets and one of the largest European banks with EUR 772 billion in total assets as at the end of 2024 and 77 million customers worldwide. The Group's franchise is strong, underpinned by its large franchise in Spain (52% of total assets as at the end of 2024), as well as its international diversification, with leading positions in Mexico (21% of total assets) and Turkey (11% of total assets) and, to a lesser extent, South American and other countries. In 2024, the Group announced a merger proposal to acquire Banco de Sabadell, S.A. (Sabadell). The resulting entity would make BBVA the largest banking group in Spain by domestic assets, based on the size of the two banks as at YE2024. In addition, combined market shares will improve to more than 20% in loans and deposits, compared with BBVA's current market share of 14% in loans and deposits in Spain. The acquisition would also reduce BBVA's earnings dependency on emerging markets and add the United Kingdom to its international footprint. A final outcome is expected in H2 2025.

Earnings Combined Building Block (BB) Assessment: Very Strong/Strong
BBVA continued its positive momentum in F2024 and posted a record net attributable profit of EUR 10.1 billion, up 25.4% YOY, and up 32.9% in constant currency (Euro) terms. The improvement in net results was largely driven by the good performance of the Spanish business, which alone accounted for 52% of the annual increase, followed by lower losses in the corporate centre. Return on equity, as calculated by Morningstar DBRS, jumped to 18.7% in F2024, compared with 16.3% in FY2023. Income was boosted by higher business volumes in all geographies and higher net interest margin, especially in Spain, as well as lower regulatory levies and lower adjustment for hyperinflation in Turkey. Efficiency levels remained strong with a Group efficiency ratio of 40.0% in F2024. Loan loss provisions increased 29.7% YOY mainly linked to higher provisions in Mexico and Turkey, followed by South America, and largely explained by model macroeconomic updates. As a result, the net cost of risk was up 28 basis points (bps) to 143 bps in F2024 compared with 115 bps in 2023.

Risk Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views the Group's credit risk profile as reflecting its relatively conservative approach, effective risk policies, retail banking focus, and diversified geographic franchise. BBVA's asset quality ratios have been resilient against the uncertain economic backdrop in recent years. Continuing the momentum, nonperforming loans (NPLs) declined 3.0% YOY at the end of 2024 driven by a substantial decline in NPLs in Spain on the back of lower net entries, higher defaults, and some NPL portfolio sales. This resulted in an NPL ratio of 3.0% at YE2024, compared with 3.4% at YE2023. In addition, the Group's NPLs are well provisioned, which led to a net NPL ratio of 0.6% at YE2024, compared with an average of 0.8% for European peers and 1.0% for Spanish banks at the end of September 2024, according to the European Central Bank (ECB).

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views BBVA as maintaining a solid funding position. BBVA's customer deposits represent the largest source of funding for the Group, accounting for 79% of total nonequity funding at the end of 2024. As a result, the Group's net LTD ratio, as calculated by Morningstar DBRS, was 92% at the end of 2024. In addition, the Group is a recurrent user of wholesale markets and Morningstar DBRS views its debt maturity profile as manageable. BBVA's liquidity position is good with a Liquidity Coverage Ratio (LCR) of 134% (or 162% including the excess liquidity in subsidiaries outside the Eurozone) and a Net Stable Funding Ratio (NSFR) of 127% at YE2024.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
BBVA's capital position is solid, underpinned by its strong internal capital generation, good access to capital markets, conservative risk profile, as demonstrated by its low Pillar 2 Requirement, and ample capital buffer over minimum regulatory requirements, especially when considering the Group's very high risk-weighted asset (RWA) density compared with European peers, of 51% at the end of 2024. BBVA reported a fully loaded CET1 capital ratio of 12.9% at the end of 2024, 21 bps higher than at YE2023, driven by internal earnings generation. This resulted in a solid capital buffer over minimum regulatory requirements of 375 bps. The fully loaded total capital ratio stood at 16.9% at the end of 2024 and the leverage ratio was 6.8%. At FY2024, BBVA's MREL ratio was 27.9% of RWAs, well above its minimum requirement of 22.8% of its total RWAs.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://dbrs.morningstar.com/research/448514.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

ESG Considerations had a significant effect on the credit analysis.

Social (S) Factors

The following Social subfactor had a significant effect on the credit analysis: Pass-through Social credit considerations. The Social factor affects BBVA as the ESG factors for the Kingdom of Spain are passed-through to BBVA given an upgrade of the Group's credit ratings is constrained by the current credit rating level of the Sovereign (see credit rating drivers).

There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.

Credit rating actions on the Kingdom of Spain are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of Kingdom of Spain are discussed separately https://dbrs.morningstar.com/issuers/15664.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024), https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for these credit ratings include Morningstar Inc. and company documents, BBVA's 2024 and 2023 quarterly reports and presentations, BBVA's annual reports (2018-23), BBVA's semiannual reports (H1 2023 and H1 2024), and European Banking Authority (EBA) and European Central Bank (ECB) data. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, the credit ratings on BBVA Global Markets B.V. are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation (with respect to BBVA Global Markets B.V.'s credit ratings): YES
With Access to Internal Documents (with respect to BBVA Global Markets B.V.'s credit ratings): NO
With Access to Management (with respect to BBVA Global Markets B.V.'s credit ratings): NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/448515.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: María Jesús Parra Chiclano, Vice President, European Financial Institution Ratings
Rating Committee Chair: Marcos Alvarez, Managing Director - Global Financial Institution Ratings
Initial Rating Date: 23 November 2009
Last Rating Date: 25 March 2024

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